Puncing on doi moi opportunities in the emerging ò viet nan

TIGER SURGICAL SUPPLIES, LTD Pouncing on Doi Moi Opportunities in the Emerging Economy of Vietnam ABSTRACT With the liberalization of economy in 1987, foreign direct investment (FDI) began to flow into Vietnam This paper presents a case study of a French manufacturer of surgical supplies who establishes a production facility near Ho Chi Minh City in an attempt to capitalize on Vietnam’s low labor costs The case explores the difficulties the company experiences in its dealings with the Vietnamese government, and a variety of crosscultural management issues are addressed as well The focus of the case is a French expatriate and a Vietnamese repatriate who experience many unforeseen difficulties in establishing and operating a facility in this newly emerging economy Bordeaux Plastique Fabriquant, S.A., a French surgical supply company decided in 1994 to establish a production facility in Ho Chi Minh City, Vietnam The company selected Vietnam as the sight for increased production capacity due to very low labor costs, and the possibility of exporting to Southeast Asian countries Management of Bordeaux felt that Vietnamese workers would be very motivated and that labor problems would be nonexistent Bordeaux also concluded that due to Vietnam’s desire to attract foreign capital, establishing a foreign subsidiary in this newly emerging economy would be easy and government relations with the company would be good Unfortunately for Bordeaux, none of these assumptions would prove to be correct Electronic Electroniccopy copyavailable availableat: at:https://ssrn.com/abstract=1112280 http://ssrn.com/abstract=1112280 Vietnam Located in South East Asia, Vietnam has attracted the attention of Western governments since at least the 19th Century In 1858 the French colonized Vietnam After internal fighting in an eight-year war, the French signed the Geneva Agreement in 1954 that lead to their withdrawal from the country and the division of Vietnam into the communist north and noncommunist south The Geneva Agreement required elections to be held for unification, however, the government in the south refused the elections and proclaimed itself the Republic of Vietnam During the late 1950’s conflict escalated between the north and south that led President Kennedy to send U.S military advisors to Vietnam in 1961 In 1965 President Johnson sent military combat forces to Vietnam The war in Vietnam escalated, and without a clear sign of victory the American public grew tired of the conflict In 1973 a peace agreement was reached and the U.S withdrew its military forces from Vietnam Within two years the communist government from the north invaded the south and unified the country into the Socialist Republic of Vietnam With its socialist economic system suffering, Vietnam instituted economic reforms in 1986 referred to a doi moi, indicating that the country was ready to move towards a market economy With the liberalization of the economy, Vietnam began to experience rapid economic growth Many Western companies raced into Vietnam due to its low labor costs and the belief that Vietnam was an untapped market Although the government of Vietnam is still communist, the economy has become more capitalistic The government, however, still maintains significant control over the economy and operates many state-owned enterprises Government bureaucracy and corruption are often seen as impediments to further economic growth Early Difficulties with the Government Electronic Electroniccopy copyavailable availableat: at:https://ssrn.com/abstract=1112280 http://ssrn.com/abstract=1112280 Philippe Desmarest, a ten-year veteran of Bordeaux was placed in charge of all governmental relations for the proposed joint venture If successful, Philippe would become the chief operating officer of the new facility Because he had successfully negotiated an international joint venture agreement with Mexican authorities a few years prior to this assignment, Philippe was considered by management to be the best candidate to negotiate with the Vietnamese Philippe made several trips to Hanoi to meet with governmental officials, including officials at the Ministry of Planning and Investment (MPI) He knew that it was critical that MPI officials agree to any foreign investment project so he was always well prepared for his meetings Philippe prepared many reports that showed how a proposed joint venture between Bordeaux and a local partner would benefit Vietnam Philippe was proposing that Bordeaux and its Vietnamese partner establish a joint venture called Tiger Surgical Supplies (TSS) and that the company produce surgical gloves, protective goggles, and fluid resistant gowns for export to Europe and Asia If initial production were successful, Tiger would then expand production into other surgical supply areas While Philippe was assured by his Vietnamese consultants, and by the joint venture partner, that Vietnam was very open to foreign investment, the meetings with the Vietnamese government did not always go smoothly It appeared to Philippe that the government officials were often confused by what he was proposing, and that they also had some suspicions about the intentions of his company When negotiations dragged on for months, Philippe became discouraged and decided to recommend to the top management of Bordeaux that the company begin looking for another country in which to locate the plant When word of this action reached governmental officials at the Ministry of Planning and Investment, the necessary permits for the plant were approved immediately Philippe decided that a tough approach in dealing with the Vietnamese was the most effective strategy A Slow Start Electronic copy available at: https://ssrn.com/abstract=1112280 Tiger Surgical Supply had purchased a building that was previously a state-owned enterprise The facilities were in need of much repair, but Philippe felt that with the abundance of extremely low labor costs in Vietnam the building could be brought up to the necessary standards in a short time, and with little expense After much more time than expected, and at a much greater expense than anticipated, Tiger Surgical Supply was ready for production in the spring of 1997 While the Vietnamese partner had helped with some governmental and construction contacts, the partner’s role in the venture was practically nonexistent Philippe preferred this passive association Philippe had selected Nguyen Tam Chien (a French citizen who left Vietnam as a child) to be the founding plant manager for the new joint venture He had been educated in France and Belgium in economics, business administration, and management and spoke passable Vietnamese In Vietnam, Chien was called a “Viet Kieu” or “overseas Vietnamese.” He belonged to a large group of Vietnamese who fled the country after the fall of Saigon fearing life under a communist government Chien’s family first settled in the United States, but after a brief stay, relocated to France Chien was now very interested in helping his former country achieve economic gains, and he welcomed the opportunity to help start a new business venture in the country Although returning to Vietnam was a hardship, Chien felt a sense of responsibility to his former homeland Both Philippe and Chien were surprised by the number of applications that were submitted in response to the advertisement for production positions Many of the applicants were well educated, and it became difficult to select the few needed from the large mass of applications Philippe delegated responsibility for employee selection to Chien, and with the help of his assistant, Pham Hi Thi, the two selected what they considered to be the best candidates One of the criteria for selection was the lack of production experience Chien felt that if he selected employees with previous experience in production that they would bring the bad habits that they learned under state Electronic copy available at: https://ssrn.com/abstract=1112280 controlled operations to TSS He wanted to be able to train the new employees in Western work methods Production got off to a slow start, and lagged far behind initial expectations Philippe reasoned that it would take some time for the employees to gain an appreciation for new concepts like productivity and efficiency Chien was not as patient and was constantly complaining to Thi about the lack of motivation he found among the workers Chien, who was from what was formerly South Vietnam, blamed the communists for ruining the work ethic of the Vietnamese people One of the habits that Chien found especially hard to accept was the practice of napping in the afternoon Chien would find that at times the entire production process would be silent and everyone in the factory would be resting or napping for about an hour Thi explained to Chien that it was customary in Vietnam to allow an afternoon nap Although Chien did not see the reason for this practice, he relented with the understanding that employees would not be paid for the time they spent not working Relations between Chien and many of the workers did not appear to be good It was obvious to all that Chien often became frustrated with the workers and would openly express his disapproval It appeared to Philippe that many of the workers did not appear to like Chien, and he wasn’t sure why Chien was a very dedicated, conscientious, and serious manager, and he had made a personal sacrifice to return to Vietnam to help his former country He expected much from his employees; however, he had a soft side as well and a true desire to make Vietnam a more prosperous country Philippe thought that some of the ill will between Chien and the work force came from Chien’s early effort to fire some poor performing employees Chien had selected 16 employees who consistently performed poorly and gave them one week to improve Thi cautioned Chien on this move, however, Chien insisted Without exception all the targeted employees showed no improvement and it was decided that all 16 employees would be fired It was with great surprise that Chien learned that terminating employment in Vietnam was no simple matter, and that the workers could appeal the decision Electronic copy available at: https://ssrn.com/abstract=1112280 to the People’s Committee, which they did The People’s Committee reinstated all the employees, much to the displeasure of Chien While it was intended that TSS would be staffed by as many locals as possible, Philippe felt that there might be a need for additional expatriates to manage the operation He considered recruiting managers from Thailand who could help bring a more “business” perspective to the supervision of TSS employees Chien and Thi disagreed and convinced Philippe that it was important that the management of TSS be “homegrown” in order to gain favor with the Vietnamese government and to help develop a managerial class in Vietnam Furthermore, they argued, having Vietnamese supervisors would provide incentive for operational level employees to work hard in the hope of gaining an internal promotion While Philippe finally agreed, he worried that most Vietnamese had been trained in management under the communist system and that it was a very ineffective way of running an organization He feared that France would soon begin to put pressure on him to improve operations Tigers, Horses, Monkeys With an urgent need for organizational efficiency, Philippe decided that TSS needed an incentive plan to increase worker motivation He instructed Chien to develop a plan that he thought would work Chien consulted Thi, who recommended against radical change, and recommended instead that wages be based on a piece-rate system Chien thought that a more systematic approach was needed, and developed a program to revamp the organizational structure Feeling that it was not practical to attempt to fire more workers, Chien created three different classes of employees The highest class, the Tiger class would be paid the highest salary and be the only employees eligible for promotion Tigers would wear red clothing and be given more privileges than the other classes of workers The second-class employees, the Horses would be paid less than the Tigers, but more than the lowest class of employees, the Monkeys The Horses would wear black clothing and be eligible for certain limited benefits The Horse class was seen as average Electronic copy available at: https://ssrn.com/abstract=1112280 performers who, if they improved, could be placed in the highest class The poorest performing employees would be placed in the Monkey class and would not be eligible for promotion or overtime assignments, nor any special benefits such as company sponsored dinners and entertainment Monkeys would wear brown clothing and were expected to pay respect to all employees in the higher classes Being in the lowest class was intended to punish and humiliate employees who were placed in that class While the two lowest classes could advance, a general feeling existed that the Monkeys would never be able to move from their position Philippe noticed that class membership tended to correlate with age, and that the Tigers were generally a younger group of employees It was hoped that the very visible class structure would motivate employees to either improve or quit the company The strong desire to save face would be a strong motivator, or so thought Chien The employees, many of whom refused to wear the appropriate uniforms, immediately challenged the class system of employment A particularly unpleasant event occurred shortly after the plan was announced The body of a dead monkey was placed over the opening of the plant gate, wearing a brown shirt, and its face covered with an image resembling that of Chien Continued tensions existed with the class system, and eventually it deteriorated to the point that the only differences among group members were pay and benefits The system, with all its problems did; however, appear to raise overall efficiency of the operation The Tigers who operated in teams were very productive, and many of the Horses were showing signs of improvement The employees classified as Monkeys continued to perform poorly Expansion Plans With some of the initial problems resolved, Philippe was eager to expand production into other areas The current facility could be expanded and additional workers hired to capitalize on the increased concern over the spreading of the AIDS virus in Asia and the subsequent increase in sales of prophylactics While Electronic copy available at: https://ssrn.com/abstract=1112280 Bordeaux did not manufacturer prophylactics, Philippe felt that TSS was in a good position to expand the product line for the company He suggested to his managers at Bordeaux that they consider expanding the production capacity of TSS Bordeaux authorized a feasibility study of the market, and the report indicated that a low cost provider could gain a competitive advantage in the Southeast Asian market With the favorable report Philippe was given the authority to begin expansion plans for TSS Following the same course that he had followed in the initial approach to establishing the joint venture, Philippe contacted the Vietnamese government officials in Hanoi and informed them of the expansion plans He felt that the officials would be delighted that TSS was increasing its investment in Vietnam and that the company would be increasing its employment The Vietnamese officials, however, who appeared uninterested in the expansion plans, did not match his enthusiasm Philippe was told that he would have to contact Tran Hung, a MPI official in Ho Chi Minh City who he was told may approve the expansion Hung told Philippe that he had some concerns about the expansion of TSS Through a translator he told Philippe that it seemed that TSS was “too French” and that the Vietnamese joint venture partner was exercising not enough influence He recommended that Philippe consider an additional Vietnamese partner, maybe someone in government who could help him with the necessary connections that he would need to expand his facility It was obvious to Philippe that Hung was suggesting that he be included in the investment This was completely unacceptable to Philippe, and so he decided to consult Chien and Thi concerning his options Chien felt that TSS should reject any involvement of government officials in the joint venture, and that Philippe should return to MPI and demand that the expansion plans be approved Thi did not appear to agree with Chien, but she remained mostly silent Chien reasoned that after all, it was the threat of withholding investment which was successful in securing the initial permits for the plant Given the advice Electronic copy available at: https://ssrn.com/abstract=1112280 offered by Chien Philippe scheduled another appointment with Hung On his arrival, Philippe was greeted with warm enthusiasm by Hung Philippe thought that someone in a superior position to Hung must have instructed him to be more cooperative in matter of foreign investment So it came as a great surprise to Philippe that Hung’s mood shifted dramatically when he was informed by Philippe that no government official would be involved in TSS, and that TSS expected the permission for expansion to be approved as soon as possible Hung was noticeably upset and informed Philippe that he may be making a big mistake Philippe informed Hung that the decision was final, and in a loud voice warned Hung that it was he who may be making a big mistake Philippe threatened Hung with adverse action from his superiors in Hanoi if he didn’t his part to gain approval for expansion As Philippe left the office he looked back at Hung who was smoking a cigarette at his desk and smiling Cutting the Tall Poppy The following day began with some troubling news from the port from which TSS shipped its products for export A delivery driver for TSS was phoning to tell Chien that the customs inspectors were not allowing any TSS product to be loaded for shipment The driver refused to give a reason, and seemed to be confused as to why the action was being taken Philippe immediately thought of Hung and proceeded to go to his office and confront him about the actions of the customs inspectors Upon arriving at Hung’s office Philippe was informed that Hung was unavailable for the rest of the day After three days had passed Philippe was finally able to schedule an appointment with Hung Frustrated by the delay in seeing Hung, and frustrated by customs problems, Philippe in an angry manner accused Hung of interfering with the export shipments Using a translator Hung denied any involvement He did tell Philippe that he had heard that the customs inspectors were concerned about possible black market products leaving the country in TSS containers Hung told Philippe that he could help him with the problem, and that it would only require the payment of an Electronic copy available at: https://ssrn.com/abstract=1112280 “inspection fee” of two dollars a container Philippe felt that he had no choice but to agree to the fee since all of TSS’s exports were pilling up on the loading docks He told Hung that the inspection fee would be paid, and that he needed Hung to instruct the customs agents to immediately clear the goods for shipment Philippe returned to his office feeling exploited by the whole experience His feelings of exploitation were increased when word came from the docks that the goods were still not being loaded Philippe immediately called Hung who informed him that now the loaders were demanding a loading fee of one dollar a container Philippe remain silent for a moment and then asked Hung why TSS was being singled out for these additional fees Hung paused for a moment and then replied in English that “the tall poppies get cut first.” Not sure what he was implying, Philippe told Hung that TSS would pay the additional dollar fee to the loaders It was at this point that Philippe was questioning his decision to promote Vietnam as a desirable location for a production facility While the additional fees were small, Philippe didn’t like the idea of paying what essentially amounted to a bribe, and he wondered what else Hung had in mind to punish him for not agreeing to include him in the partnership expansion plans Philippe wondered if the government would ever approve the expansion, and if he had made a mistake in recommending Vietnam as an investment location Sources Buchel, B and T Lai Xuan (2001) Measures of Joint Venture Performance from Multiple Perspectives: An Evaluation of Local and Foreign Managers in Vietnam Asian Pacific Journal of Management, 18(1), 101-111 Curry, J and C Nguyen (1997) Passport Vietnam San Rafael, CA: World Trade Press Prasso, S (1999) Vietnam: Welcome Back? Business Week August, 16 Triandis, H., Carnevale, P., Gelfand, M., Robert, C., Wasti, D., Chen, X., Kim, U., Dreu, C., Vliert, E., Iwao, S., Ohbuchi, K., and P Schmitz (2001) Culture and Deception in Business Negotiations: A Multilevel Analysis International Journal of Cross Cultural Management, 1(1), 73-90 Electronic copy available at: https://ssrn.com/abstract=1112280 Venard, B (1998) Vietnam in Mutation: Will it be the Next Tiger or a Future Jaguar? Asian pacific Journal of Management, 15(1), 77-95 Webster, L (1999) The New Breed Vietnam Business Journal, 8(4), 18 www.state.gov/backgroundnotes/Vietnam Accessed on June 8, 2002 This case was prepared by Charles A Rarick Electronic copy available at: https://ssrn.com/abstract=1112280 ... Following the same course that he had followed in the initial approach to establishing the joint venture, Philippe contacted the Vietnamese government officials in Hanoi and informed them of the. .. the country into the Socialist Republic of Vietnam With its socialist economic system suffering, Vietnam instituted economic reforms in 1986 referred to a doi moi, indicating that the country... South Vietnam, blamed the communists for ruining the work ethic of the Vietnamese people One of the habits that Chien found especially hard to accept was the practice of napping in the afternoon